The San Francisco custodian's Institutional Intelligent Portfolios is expected to legitimize the robo concept but significant unknowns remain

June 19, 2015 — 6:02 PM UTC by Lisa Shidler


Editor’s Note: Since we published this article five days ago, Schwab has in fact launched its robo-offering. There were no obvious revelations in the press release that went beyond what is contained in this article. We had hoped Schwab may have revealed results from pilot testing or beta versions as it launched. Thus far that kind of information has still not been provided.

Brooke’s Note: As many as 85% of Americans receive no real financial advice. As many as 99% don’t get the glancing help of a fiduciary. With Schwab rolling out its robo to RIAs, there is hope that the time involved in closing those gaps can accelerate. Schwab’s offering can be criticized and some of those points are covered in this article. I am not overly concerned with those concerns because the free market will mete out corrections if they are needed. In launching to RIAs, Schwab has created a world of competitors to its own robo-offering and a world of sophisticated, discerning eyes reading its small print. RIAs will boldly be offering suggestions for improvement with competent competitors standing by as alternative robo-technology providers.

Schwab Advisor Services is sticking to its robo-promise to RIAs.

The San Francisco-based RIA custodian for 7,000 RIA firms and $1.2 trillion of their assets will launch Institutional Intelligent Portfolios by June 30 — as promised — loaded with 450 exchange traded funds, according to RIAs that have been in touch with Schwab and by Schwab itself.

The robo-effort is already an explosive success for Schwab on the retail side gathering $2.8 billion — according to a spokeswoman — of managed assets since March. That’s a big enough number to put Schwab in the lead [though it declined to say whether any of the $2.8 billion comes from beta RIA users] and pulling rapidly away from the competition. Betterment Inc. and Wealthfront have AUM of about $2.4 billion each. Betterment includes RIA assets in its count, an amount that may be substantial. See: After Schwab and Betterment catch up to Wealthfront’s AUM, the Palo Alto robo pioneer makes a stunning hire.

Far from being threatened, Schwab’s smaller-fry robo competitors are looking forward to the launch having made the initial heavy lift of not only developing the robo technology but getting past the psychological hurdles of getting advisors to give it a try.

“Having Schwab on board really helps us,” says Steve Lockshin, founder of AdvicePeriod and principal at Betterment Institutional. “The advisor solutions are really a bionic platform and we’re creating a category that is needed. Schwab is creating awareness. What if Baskin-Robbins said they’re only serving one flavor? People would be angry. People want choice and Schwab is advertising for all of us.”

Jemstep Inc. founder Simon Roy also thinks the Schwab robo launch lifts all boats. “If anything this has increased an interest in Jemstep and we’re seeing much more attention. This has generated a lot of advisor demand and interest,” he says. See: Orion and Jemstep form first big marriage of non-robo and robo software — at advisor behest — to create RIA e-commerce.

How free is free?

But Roy questions aspects of Schwab’s offering, including its advertising itself as “free,” and says many advisors will realize that using a free platform may not be the best option. Roy’s firm charges 15 basis points on managed assets for basic accounts. See: Schwab spills robo-beans to Wall Street, including a Schwab Bank wrinkle, cannibalization rates and the algorithm’s distaste for OneSource funds.

In fact, the “free” tag may be a red flag to seasoned RIAs who know that free often connotes “hidden,” a ploy being tolerated less and less as fiduciary standards rise.

“I think being free may make them cautious,” Roy contends. “I think advisors are becoming smarter shoppers when it comes to technology and they understand nothing is truly free and there is a cost to the service that will be paid in some way — likely paid out of clients’ portfolios. For RIAs who are fiduciaries they should be selecting the portfolios for their clients and the cost should be explicit.”

Some Schwab RIA clients, including Ajay Gupta, use Jemstep. See: Swamped by Tony Robbins’ referrals, Ajay Gupta launches national venture with Jemstep and United Capital as notable partners.

Early innings

Steve Lockshin: People want choice and Schwab is advertising for all of us.
Steve Lockshin: People want choice and
Schwab is advertising for all of

But though there are scattered robo success stories like Gupta’s, advisors are still not actively shopping for robo-technology, according to Lockshin.

“The entire industry seems to have their head in the sand. Lots of talk, lots of dismissing and, although that’s changing, very little action.”

When Lockshin speaks at an industry conference, he always asks how many advisors are using robo products. He reckons about 5%. And when he asks who is using two robo solutions, no hands are raised.

“This is really the top of the second inning in this space,” Lockshin says. See: Thoughts on 'robo-advisors’ served cold, compliments of Kitces and Waymire.

Promising features

Still, Roy cautions that Schwab’s market entry is no panacea due to some of the big-company baggage it brings with it.

For example, he believes Schwab’s cash requirement for portfolios will be viewed negatively by advisors. “I think advisors appreciate a model where the fees are explicit and they get to be in control of portfolios, allocations and strategies. That is one thing we’re seeing.”

But Rita Lee, director of research at Tiburon, Calif.-based Brouwer & Janachowski is largely pleased with the Schwab robo after her initial vetting of the product, and her firm is leaning toward its use.

Lee likes that Schwab’s new offering is flexible enough to allow for customization, including allowing an RIA to white label its product. Her firm can send out a link that will allow the client to set up the entire account without any paper. The client would fill out a risk assessment and then the RIA would get an alert that the client has signed up. Lee says once her firm gets an alert, it would set up the asset allocation.

There is a minimum of $5,000 to open a robo-account, a cliff-drop lower than her firm’s usual $1 million account minimum. Lee is convinced this is the perfect way to get clients with fewer assets on board. See: Marty Bicknell buys a $1.1 billion RIA that serves the mass affluent, and taps credit for the first time.

“It’s a tool for us to help smaller accounts and get a good asset allocation and keep them invested since people aren’t disciplined,” Lee says.

But Lee says she doesn’t yet have all the information she needs to go all in.

“We have some outstanding questions,” she says.

Wide ETF selection

For instance, Lee wants to know the algorithm involved in the investment selection and she wants to better understand how allocations change. She worries that daily allocation changes could be costly.

“If the risk tolerance is 20% in bonds and the algorithm will rebalance it to 20% and I want to know how far it will drift,” she says. “The fewer trades you make, the further you will drift away from 20% but if they’re trading daily then that’s a lot of trades. I also want to know if I make a change to models does that automatically trigger a rebalance. These are some of the questions we need to know. We think this is a tool for smaller accounts. This is a pretty good tool and it’s not bad at all.”

One aspect Lee is quite impressed with is the ETF selection. “A lot of the popular ones are already on it and you can trade for free.”

Right now, SPDER 500 (SPY) is on the list as well as the Vanguard Group’s emerging-market ETF (VWO). See: Schwab snares its first clients for ETF-only 401(k)s as one of its 401(k)-focused RIAs defects to TD Ameritrade.

Cash allocations

There will still be a minimum of 4% cash for advisors. There is no fee for RIAs who hold $100 million assets at Schwab and a 10-basis-point fee for RIAs with less than $100 million. See: Schwab makes thousands of its RIAs subject to fee for robo-software, allocation of client cash to Schwab Bank.

The good news is that the cash allocation requirement for RIAs is lower than the retail offering, See: Schwab tells the SEC its robo-advisor has a 30 basis-point fee and big-time cash allocations held by Schwab Bank.

“There are some key differences between this platform and the one for retail. The minimum cash for retail is 7% and can be a lot higher. With the advisors the minimum is 4%,” Lee says. “If it’s in a money market, you’re paying too. This does a lot of work for you. You can start a small account and continually add money and trade for free with this platform.”

Custodian horse race

Schwab is entering a startup-studded market in which robos like Los Altos, Calif.-based Jemstep Inc. and New York-based Betterment Inc have been in business for a handful of years. See: On strength of $1.4 billion of AUM and 90 RIA clients, Betterment raises $60 million of VC funding as it looks to disrupt RIA custody.

But Schwab’s real competition is among RIA custodians. It lags behind Jersey City, N.J.-based TD Ameritrade, which has a number of robos using its Veo platform, including Jemstep, Trizic, Upside and Blueleaf.

Fidelity Institutional Wealth Services has partnered with Betterment intensively as a means of probing the market and its practice-management implications. See: Fidelity and Betterment sign a deal with Steve Lockshin and Marty Bicknell as groomsmen at the altar.

But Schwab is perhaps a half a lap ahead of Pershing Advisor Solutions, which only just announced a partnership with the IBM Watson Group and Marstone to launch a robo effort in 2016. See: At INSITE in Orlando, Pershing outs its robo-religious conversion complete with open API store, Silicon Valley and India skunkworks, Marstone robo deal and unabashed digi-speak.

Share your thoughts and opinions with the author or other readers.


Deborah Fox said:

June 22, 2015 — 9:20 PM UTC

I expect that Schwab’s “robo” will be successful by any measure just due to the fact that advisors will be able to install an automated investment service platform relatively seamlessly – at least from the technology side. The big question still to be answered for both advisors and Schwab is will the assets on the platform stick over the long-term? Many investors (and advisors) do not consider it necessary to hold an ETF “long term”.

It remains to be seen what happens when investors need to sell shares of their portfolios for rebalancing during a volatile time. They could very well find out they were subject to volatile intraday trading tracking and discrepancies. Outside of the Institutional Intelligent Portfolios platform, investors could have had their advisors purchase index mutual funds at net asset value for their clients at any time. Other platforms such as Jemstep and Trizic provide that kind of choice to the advisor – but not for Schwab “free.”

Another concern should be the low balance accounts on the platform advisors use to begin establishing a low touch relationship with younger or less affluent investors. The do-it-yourself model is devoid of an interaction with an advisor. Will the ability to sell out of their accounts at anytime cause investors to trade too often when the fear or greed emotions get the best of them? Advisors utilizing Schwab’s offering for signing up the masses or less profitable clients won’t be able to provide the human backstop to temper bad behavior.

More importantly, robo-technology, just like any other new disruptive technology that comes along, requires a well-defined firm strategy paired with a training and implementation plan for successful adoption. Unlike the Institutional Intelligent Portfolios’ rebalancing feature, the platform won’t automatically set itself up and attract new clients or serve existing clients. After the technology decision is made, advisory firms need to realize that the practice management piece is the most important component to pay attention to to drive ROI, no matter which business model is chosen.

Deborah Fox
CEO Fox Financial Planning Network


Jack Waymire said:

June 23, 2015 — 3:52 PM UTC

Schwab’s “free” service is not free, but it made a smart decision to not charge for advisory services (asset allocation, manager selection, performance reporting) so it does compete with the financial interests of its 7,000 RIAs. This opens the door for RIAs to use the service and charge an advisory fee that is not layered on top of a Schwab fee. At the same time it provides investors with a choice: Robo, Virtual, or Traditional Financial Advisor.


Robertamat said:

June 28, 2015 — 9:22 PM UTC

Умный московский специалист по морозильникам за неделю приготовит и выполнит [url=]вентельный ремонт холодильников Самсунг[/url] без мусора на даче с гарантией на все комплектующие.Ознакомиться и распечатать цены вы можете у нас на сайте.


увеличенный [url=]хладоновый ремонт холодильников[/url]
[url=]компрессорный ремонт холодильников[/url]
[url=,]комплексный ремонт холодильников Фрунзенская[/url] для людей
белый [url=]плавкий ремонт холодильников[/url] среди полуночи

Submit your comments: